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Scottrade: Not The Marrying Kind


For an Internet entrepreneur, Rodger O. Riney is pretty old-fashioned. The 59-year-old founder and chief executive of Scottrade, the nation's sixth-largest online broker, thinks that branches in strip malls are just as important as whiz-bang PC trading technology. The soft-spoken St. Louis native is also content with a business model that's dependent on trading commissions, as rivals push into investment advice and banking. And while most e-broker chiefs are scurrying to merge, Riney insists he'll never sell out: "I'm happy operating independently."

That makes him a rare bird. Weak trading volume and excess capacity have plagued many e-brokers. Consolidation looks to be the easiest way of garnering more trades and propping up profits -- witness the proposed merger of Ameritrade Holding Corp. and TD Waterhouse.

Scottrade would be a prize catch. In 2002 it accounted for just 5% of online trades. But with its $7 trades -- among the lowest in the business -- it has captured 11.5% of the market, largely at the expense of Ameritrade, E*Trade Financial, Charles Schwab (SCH), and Waterhouse. In fact, Fidelity Investments has about the same share, although it has nearly 10 times more clients. Riney says investment bankers often drop hints about a deal -- which he ignores. And he has never met Ameritrade CEO Joseph Moglia, a serial acquirer who has scooped up seven firms in four years.

Of course, it's easy to remain independent if you own the firm. Riney and his family control about 80% of the business, which started in 1980 and moved online in 1996. So he doesn't fret over maintaining fat profit margins the way publicly traded firms do. Indeed, Riney's profits don't stack up against those of peers. Scottrade's aftertax margins exceed 15% on revenue of $350 million a year. Ameritrade's margins hover around 30% on $880 million. "You can grow without consolidation, but you're not maximizing the potential of the business," says Ameritrade's Moglia.

WATCH THE OVERHEAD

Riney, though, worries more about Main Street than Wall Street. Instead of talking about profit goals, the down-to-earth father of three talks passionately about serving clients and taking care of employees. For example, he kept bonuses in 2001 and 2002 even when sales sank.

Riney earned an engineering degree at the University of Missouri, but decided he preferred stocks to steel. He took an unpaid internship at brokerage Edward D. Jones & Co. in 1965 and climbed the corporate ladder, doing everything from revamping a branch in Pueblo, Colo., to starting the company's personnel department. After he broke out on his own, his former boss and the founder's son, Ted Jones, gave Riney a piece of advice just before he died: Watch your overhead.

Certainly, his operations are lean by Wall Street standards. Branch furniture is basic; even the St. Louis headquarters is decorated with travel posters from cities where Scottrade has offices. The firm passes along savings in the form of cheap trades. It doesn't levy inactivity or maintenance fees, as do most of its peers.

Riney is now ramping up Scottrade's services. While Schwab and Waterhouse have been closing branches, Riney is expanding his network of 233 offices by 15% to 20% a year. He has also introduced services for the fast-growing financial adviser market, such as one that lets planners manage their accounts and execute trades. And he has set up a system allowing mainland Chinese investors to trade.

Scottrade's combination of service and low cost is making it a major challenger to rivals. "In the past, they have not been too worrisome because they were seen as a tertiary brand," says Fox-Pitt, Kelton analyst David Trone. "Now they're viewed as an upstart that could become a problem." And thereby a sweeter prize for a would-be buyer.

By Adrienne Carter in St. Louis


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